Voice

America resurgent?

Hey, remember how, four months ago, Americans were convinced that China was taking over the world and the U.S. was on the way out? 

I bring this up because the New York Times' Floyd Norris,  Business Week's Mike Dorning, and Slate's Daniel Gross have long stories suggesting that the U.S. economy is about to come roaring back (though see Kevin Drum for a pessimistic counter).  This section from Gross' story captures the basic idea:

[T]he long-term decline of the U.S. economy has been greatly exaggerated. America is coming back stronger, better, and faster than nearly anyone expected—and faster than most of its international rivals. The Dow Jones industrial average, hovering near 11,000, is up 70 percent in the past year, and auto sales in the first quarter were up 16 percent from 2009. The economy added 162,000 jobs in March, including 17,000 in manufacturing. The dollar has gained strength, and the United States is back to its familiar position of lapping Europe and Japan in growth. Among large economies, only China, India, and Brazil are growing more rapidly than the United States—and they're doing so off a much smaller base. If the U.S. economy grows at a 3.6 percent rate this year, as Macroeconomic Advisers projects, it'll create $513 billion in new economic activity—equal to the GDP of Indonesia....

So what accounts for the pervasive gloom? Housing and large deficits remain serious problems. But most experts are overlooking America's true competitive advantages. The tale of the economy's remarkable turnaround is largely the story of swift reaction, a willingness to write off bad debts and restructure, and an embrace of efficiency—disciplines largely invented in the United States and at which it still excels. America still leads the world at processing failure, at latching on to new innovations and building them to scale quickly and profitably. "We are the most adaptive, inventive nation, and have proven quite resilient," says Richard Florida, sociologist and author of The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity. If these impulses are embraced more systematically and wholeheartedly, the United States can remain an economic superpower well into the current century.

So what will our new economy look like once the smoke finally clears? There will likely be fewer McMansions with four-car garages and more well-insulated homes, fewer Hummers and more Chevy Volts, less proprietary trading and more productivity-enhancing software, less debt and more capital, more exported goods and less imported energy. Most significantly, there will be new commercial infrastructures and industrial ecosystems that incubate and propel growth—much as the Internet did in the 1990s.

If this happens, it would be consistent with the aftermath of past crises.  The U.S. tends to bounce back more quickly from global shocks -- including those caused by the United States.

What's intriguing about all of this is whether a U.S. economic resurgence would affect American attitudes about the rest of the world.  Afghanistan, Iraq, and the economic downturn have caused a lot of Americans to (understandably) grow weary of sustained engagement in other parts of the globe.  If the economy turns around, a lot of attitudes about foreign affairs might become less sour. 

Question(s) to readers:  do you think the U.S. economy is primed for an supercharged recovery?  If so, how will that affect attitudes towards American foreign policy? 

Mario Tama/Getty Images

Daniel W. Drezner

China is signaling a change on the yuan. Why?

There's been a spate of stories over the past few days suggesting that China is about to shift its policy on the yuan, allowing the currency to appreciate against the dollar.  Keith Bradsher's latest in the New York Times has the most detail, so let's look at his story: 

The Chinese government is set to announce a revision of its currency policy in the coming days that will allow greater variation in the value of its currency combined with a small but immediate jump in its value against the dollar, people with knowledge of the consensus emerging in Beijing said Thursday....

The model for the upcoming shift in currency policy is China’s move in 2005, when the leadership allowed the renminbi to jump 2 percent overnight against the dollar and then trade in a wider daily range, but with a trend toward further strengthening against the dollar. For the upcoming announcement, however, China is likely to emphasize that the value of the renminbi can fall as well as rise on any given day, so as to discourage a flood of speculative investment into China betting on rapid further appreciation, they said.

The emerging consensus within the Chinese leadership comes as Treasury Secretary Timothy F. Geithner held meetings on Thursday with senior Hong Kong officials and prepared to fly on Thursday evening to Beijing for a meeting with Vice Premier Wang Qishan. 

Now, given the degree of hostility between China and the United States as late as last month, we have to ask the question:  what caused the shift in China's policy?  Bradsher provides multiple answers: 

China’s commerce ministry, which is very close to the country’s exporters, has strenuously and publicly opposed a rise in the value of China’s currency over the past month. But it appears to have lost the struggle in Beijing as other interest groups have argued that China is too dependent on the dollar, that a more flexible currency would make it easier to manage the Chinese economy and that China is becoming increasingly isolated on the world stage because of its steadfast opposition to any appreciation of the renminbi since July, 2008....

People with knowledge of the policy deliberations in Beijing said that Chinese officials had made the decision to shift the country’s currency policy mainly in response to an assessment of economic conditions in China, and less in response to growing pressure from the United States and, less publicly, from the European Union and from developing countries.

So, what's going on?  First, it's possible that the policy shift will just be a token move.  I'm confident that China won't appreciate as much as, say, Chuck Schumer wants.  That said,  this doesn't sound like a token-y move. 

If China's shift is a real one, there appear to be three possible sources of change:

1)  Domestic factors and actors convinced China's leadership that diminishing marginal returns for keeping the yuan fixed and masively undervalued had kicked in;

2)  China responded to mounting multilateral pressure and feared being isolated at the upcoming G-20 meetings. 

3)  China responded to threats of unilateral U.S. action, such as being named as a currency manipulator, and/or calls for a trade war;

These are not mutually exclusive arguments, and we might never know exactly what caused China's .  But for the record, I think (1) and (2) maqttered a hell of a lot more than (3).  That said, I can't rule out the possiblity that their antics helped scare China into action. 

Yuan hawks like Paul Krugman and Fred Bergsten have been very silent as of late.  I'll be veeeery curious to read their reactions to this latest turn of events. 

Am I missing anything?